Markets Tumble, Time to Sell?, A Rare Bull Market, and More!

by Addison Wiggin & Ian Mathias

  • Markets fall… why you should expect more pain in the coming days
  • Thus, time to sell? Byron King on managing your portfolio during these turbulent times
  • How holding cash could be the worst investment of them all… the latest stunning CPI report
  • Washington to the rescue… could an “economic stimulus” revive ailing markets?
  • Kevin Kerr on a domestic bull market alive and kicking
  • Plus… a die-hard Ron Paul supporter who’s not voting for Ron Paul

Sell, baby… sell. That was the word on the Street yesterday. And sell they did.

Citi’s horrid earnings announcement, lousy retail results and wholesale prices rising faster than they have since Flashdance was a box office hit all conspired to hand the major indexes their worst day of this new year.

The Dow fell 277 points, or 2.1%. The Nasdaq and S&P 500 fared even worse, down 2.5% each.

It’s not over yet. Intel issued an earnings warning after the bell yesterday, which will more than likely drag techs down all day today. Wells Fargo failed to beat estimates in its earnings announcement. Big surprise there. JP Morgan missed expectations in an earnings announcement of its own.

Washington Mutual, Merrill Lynch and Bank of America will report earnings this week too. We suspect none of them will bear good news.

And for what it’s worth, the market malaise in the U.S. spread abroad overnight. Chinese, South Korean, Australian, Philippine and Taiwanese markets all fell over 2.5%. In Japan, the Nikkei 225 plunged 3.4%.

English and German stocks fell 1%. France was down 0.3%

“It might be time to lighten up on your common stock holdings,” Byron King advised his Outstanding Investments readers yesterday. This is the third time since the Bear Stearns revelation back in July that we’ve been in the position on looking ourselves in the mirror, asking what now?

“If you are nervous about the prospect of a looming bear market,” King counsels, “sell some portion of the winners in the portfolio and take the funds off the table. Hold the cash in reserve for future opportunities. How much should you sell? Don’t feel bad about selling 10% or 20% of your shares and booking the gain. It is better to pay taxes (especially on long-term capital gains, at 15%) than to absorb losses. And by all means, stay away from margin debt.

“The message to take away from the past few months of market volatility is that the days of easy credit are over. The steadily appreciating — and sometimes irrationally booming — stock markets of the last 20 years or so are probably coming to an end. There are many implications in all of this, not the least being that many of the hedge funds that have come into existence in recent years, as well as much of the hedge fund trading, are doomed propositions. Don’t be surprised to see a lot of unloading in the realm of energy futures and metal holdings as capital-starved firms do the equivalent of burning the furniture to stay warm.

“But whatever happens, we still believe — for many reasons — that the energy and natural resource sectors are and will remain good places for investment. Through thick and thin, we believe that gold and oil will generally follow rising trends.”

Of course, holding “cash” if it’s in U.S. dollars isn’t exactly a smart move these days, either.

Today’s Consumer Price Index (CPI), for example, shows that prices for food, energy and haircuts rose an average 4.1% in 2007 — their highest rate since 1990. Energy soared an impressive 17%. And food is up nearly 5% since this time last year.

Of course, if you don’t eat, drive, heat your home, turn on lights or watch football on TV, your cost of living got only 2.4% more expensive this year.

Looking at the most recent numbers, CPI rose 0.3% in December. Over the last three months of the year, consumer inflation rose at an annual rate of 5.6%. Wherever you’re holding “cash,” if it is in U.S. dollars and not yielding 6%, you’re losing money.

Currency traders endured big swings in dollar trading yesterday. The dollar index sank like a stone at the U.S. open, coming less than a point away from its all-time low of 74.4. But within hours, the dollar recovered and continued a slight rally in trading overnight.

The euro is clinging to $1.48 like a 4-year-old whose parents are leaving for a dinner party. The pound has almost managed to stem its bloodletting of late. The queen’s currency has steadied itself at $1.97.

Alas, the yen proved to be the big winner overnight, as risk aversion took full effect around the world. Japan’s currency rose to 2 1/2-year highs versus the greenback, up to 106.

“In the absence of the gold standard,” former Fed chair Alan Greenspan wrote back in 1966, when he was still hanging with Ayn Rand and blowing sax in nightclubs on the Lower East Side, “there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Gold’s price fell victim to yesterday’s sell-off, as well. The metal’s price has fallen over $30 from Monday night’s high of $914, down to as low as $875 this morning. Gold is rebounding as we write, inching into the $880 range.

“All the stars are still aligned to catapult gold into the lead vis-a-vis the other commodities this year,” reports our gold man Ed Bugos. “You have heightening political instability in the Middle East, wars, financial crises, the election, tight supplies, dwindling mine production and a growing sense that central banks are going to continue inflating until Mammon himself drowns in green.

“It is conceivable that it can rally another $300 in the next few months before the seasonal weak period kicks in during the second quarter. For now, at any rate, there’s little sign of a top. This move is long overdue.”

Oil fell yesterday as the market succumbed to the “recession = less energy demand” theory. Prices fell $2, to $91, during the sell-off, and then dropped another buck overnight as rumors leaked that today’s inventory report would show an unexpected increase in crude supplies. As we write, black gold sells for about $90 even.

While heads were rolling on Wall Street yesterday, Ben Bernanke and Nancy Pelosi shared a nice cup of tea in front of the cameras:

Washingtonians drooling over rumors of an impending “stimulus package.”

This pretentious photo op was preceded by a 27-page Congressional Budget Office report, which recommended the wonks and pols do what they love to do best: spend your money. Who knows what they’ll settle on at this point — housing crisis funds, tax credits, Social Security boosts, expanding unemployment insurance — but never fear, they’re sure to be multibillion-dollar endeavors.

“This is all beginning to remind me of Japan in the ’90s,” laments EverBank’s Chuck Butler. “Their gov’t kept coming up with one stimulus package after another, only to fall deeper into their decade-long funk…

“Could the U.S. be headed into the same type of funk? I would have to think that the growth engine in the U.S. would keep us from that, but Japan didn’t have the debt that we have going against us, nor did they have the housing and collateralized debt obligation/credit default swaps meltdown, nor were they fighting a war… YIKES!”

The Baltic Dry Index fell for its sixth consecutive day yesterday. The measure of global raw material shipping fell by about 4.2% — we hear its biggest drop since 1989. Looking at the premarket data this morning, the Baltic seems set for another doozy of a drop.

On Monday, we learned “cotton acreage and carryover supplies have dropped dramatically,” reports our Maniac Trader Kevin Kerr. “As more and more farmers shift out of the cost-intensive, low-margin cotton to things like wheat, corn and soybeans, supplies of cotton will dwindle even further.”

Consequently, yesterday, the cotton market hit a two-day limit-up rally of over 600 points.

“The volume of buying was so swift and merciless that the ICE (the electronic trading platform) had to shut down on Monday and only pit orders were being accepted, which made for an even more chaotic situation. It wasn’t a good sign, since all of the NYBOT products are supposed to go 100% electronic at the end of February.

“Anyway, cotton is delivering significant profits, and I expect it to go higher.” If you’re not trading these markets alongside the Maniac, maybe you should be.

Ferrari unveiled its first-ever biofuel-powered sports car this week. The penultimate luxury automaker showcased its new F430 Spider concept at the Detroit auto show on Monday, the first of the Ferrari fleet to consume E85.

The car will run on a mix of 85% corn and 15% gas, perhaps the most popular blend here in the States. It would appear that even niche brands like Ferrari are preparing for the government-mandated future of ethanol. We haven’t heard any revised MPG data, but we’re guessing it’ll consume corn at an equally stunning pace as its gas-powered predecessor. But hey… it’s got snazzy green stripes! Must be earth friendly…

“I have been doing business in China for 17 years,” writes a reader. “The RMB (renminbi or yuan) rate was always fixed, and for a long time was 8.2 to $1. Starting in 2006, the Chinese started a gradual upward valuation of the currency. On Jan. 16, 2007, the rate was 7.79 to $1. On Jan. 14, 2008, it was 7.25 to $1.

“While not freely convertible in the Western world, I can assure you that in the Eastern world, you can change a pocketful of RMB to any currency you wish at the posted rate of the day, which generally is less favorable to the dollar as each day passes.”

The 5 responds: The Chinese are in a bit of a quandary over pegging their currency to the U.S. dollar. The yuan was down 9% against the euro in 2007. So what are they to do?

“The changes [in their dollar peg] this month alone,” reported the Telegraph yesterday, “would see a 15-16% hike on an annualized basis, and markets are starting to estimate that the gain may be as much as 9% over the year. That would bring the total change since the government abandoned the fixed peg in July 2005 to nearly 20%.”

Officially, the Chinese aren’t dropping the peg. But 20% in less than two years sure tells a different story. Of course, if the dollar were to rally or even hold steady, you’d see a reversal in these changes in a heartbeat. The real danger is a sudden drop in the dollar. That would spook the Chinese even more and exacerbate the problem. Goodbye, greenback.

“I look forward to your 5 Minute Forecasts every day,” writes a thoughtful reader from Texas. “I always get them just in time for lunch.

“Ron Paul used to be my congressman, back before the last time Texas was redistricted. I wrote letters and e-mail to him frequently about issues that concerned me, and I always received prompt responses. (In contrast, I once wrote a letter to then-Gov. Bush’s office regarding his policy on states’ rights. It took six months to get a response, and I wasn’t encouraged by what it said.)

“I met Dr. Paul on a couple of occasions — he came into a store I owned in San Marcos, Texas, one day to talk to some of my patrons about his ideas. I found him to be personable, down-to-earth, a man of deep conviction and integrity. Just the kind of person we need to be president. In my opinion, his only shortcoming is that he doesn’t really have a “presidential” charisma.

“I’ve been really excited about all the Ron Paul bumper stickers, yard signs and overpass banners, as well as the attention he’s received from other readers. It gives me hope for the direction the mood of conservative voters is taking.

“All that said, I will not vote for Ron Paul in this election. Even if he were elected, he would not be able to implement the changes that this country needs to get it back on track. He would need the support of the legislature, and unless a whole lot of The 5 readers suddenly decide to run for the House and Senate in their districts, he wouldn’t get it. No (other) incumbent has the integrity and political nerve to do what needs to be done. It will cause a great deal of short-term pain, and that won’t win re-elections.

“As you pointed out yourself in yesterday’s 5, “… the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.”

“That’s going to happen, no matter who is elected. I adore Dr. Paul (as a congressman) too much to have it happen on his watch. Come to think of it, that may be just the right reason to vote for Hillary or Obama!”

Addison Wiggin,
The 5 Min. Forecast

P.S. “I.O.U.S.A.,” says a LA Times article covering the Sundance Film Festival, “as it cautions us about the problems we are getting into with a national debt as big as the Ritz, might be the most unexpectedly frightening movie in the festival.”

We’re heading out this afternoon. After a rather circuitous route through New Hampshire, we’re arriving in Park City, Utah, tomorrow night. The festival begins on Friday.

Surprised as we are about it, we’re kind of anxious about the whole thing. There are supposed to be 50,000 attendees at the festival this year. Check it out: “Small Town, Large Impact”.

According to The Wall Street Journal over the weekend, the writers strike in Hollywood could actually be working in our favor. A year from now, there will be very few completed movies on the market. That makes the completed ones in this festival all the more attractive to prospective distribution companies. Of course, they still have to like the movie. That part remains to be seen. Heh.


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